No sign of ‘green shoots’ as summer ends

September and October is the time of year when client budgets are signed off and pots of expenditure are allocated to projects and departments. Information companies set out with their newly polished presentations and product manuals to secure some of that spend and win the contracts that will see them into the next year. But this year there is still little confidence out there. Budgets are still reined in.

Some commentators have started to call the bottom of the recession or a deceleration of decline, but the fact is that buyers of research and information are not giving expansive or growth signals, and as a result research suppliers cannot commit to strategies other than cost control: removing headcount, products and divisions. With a shrinking market and increased price competition expect much more consolidation among research companies.

And here’s why buyer confidence is so low. Aggregated earnings estimates for the ten largest buyers of information for each of the 14 largest-spending industry sectors are significantly down since January. Earnings estimates are guided by interactions with CEOs and CFOs who aren’t communicating a great deal of confidence in growth externally nor, presumably, within their organisations either.

This means that as of today all these companies are expected to earn less than expected at the turn of the year when the financial meltdown was at its worst. We find this staggering. These 14 industry sectors account for 85% of all information purchasing, 27% of which is market research, and the balance includes data and analytics, credit reference and company information, reports and advisory, magazines and conferences. All of these information sources compete for budget currently controlled by the finance department, and some are faring much worse than others as budgets tighten. Spending on sending delegates to conferences, for instance, is down 40%, and spending on consultancy/advisory is down at least 25%.

But how can profit forecasts be lower while stock indices are higher? Much has been made of the significance of the stock markets’ rallies since the beginning of the year and record-breaking consecutive days of gains over the last month. It is inconsistent and we feel that there’s a lot of misplaced confidence among the investment community.

As a rough guide we follow two ‘green shoots’ indicators. The first is two consecutive quarters of financial services company growth (based on the ‘first into recession, first out’ principle), which we’ve had from the banks even though many banks performed poorly in all but the trading divisions of their investment banks (retail banks have had a terrible first half). That’s what the numbers tell us.

The second indicator is CEOs starting to talk about growth again, as CEOs are the ultimate control on strategy. This is certainly not happening. Words such as ‘prudence’, ‘unclear economic environment’, ‘continue to manage cost base’ characterise the themes of interim results presentations across all sectors.

In the first half of the year we estimate that only 12 of the Research Ratings 100 grew revenue on an organic constant currency basis. The Research Ratings 100 are the 100 information firms that companies spend most on. Of those 12, three are market research companies: Research Now, Arbitron and ComScore. The rest are data and analytics companies, selling primarily to healthcare and financial markets. In all those cases it has been the analytics side which has kept client churn low as the information is embedded into their work processes. Interestingly, at least two of the three market research companies mentioned have business models that are similar or even identical to data and analytics companies.

So where are we advising our market research clients to put their money? Firstly, in defending current market positions with superior service and competitive pricing. Next, the focus should be on proprietary data sets and software/analytics as these areas are the springboard for success in better times. Sectors we favour for organic growth over the short term are energy, utilities and financial services. Oh, and anything BRIC-related remains a good bet. This is an opportunity to build scale through M&A and we fully expect a deluge of acquisitions in the medium term as private equity cash is set to target the sector as never before.

We are still confident that the year will turn out OK for the market research industry, so prospecting in Q3/Q4 is still important. We maintain our forecast for (constant dollar) growth this year of 0-2% even though spending declined against 2008 by 8% in the first quarter and was flat in the second quarter. But one caveat: if the stock market suffers a reversal late in the year it’s likely to damage recovering and fragile confidence and put the kibosh on the all-important fourth quarter.

^{Stuart Butler-Smith is an adviser to information companies and the founder of ResearchRatings.com, a data service for information companies. Previously he was COO of Datamonitor plc which was sold to Informa plc for $1bn in 2007.}